Property Investment Optimization on Corporate and Taxation Level

As a family office for wealthy private investors we could gain a lot experience in the last years regarding those issues. This article is a basic introduction and doesnot substitute professional advise.
The article is suitable and addresses the needs of investments between 500k and 20 Mio Euro.

Executive summary:

Company and tax structure have to be decided before acquisition, otherwise decisions are made under (time) pressure.

German corporate law offers flexibly company structures to minimize liability and taxation.

German tax law offers very convenient tax rates especially for foreign investors.

Cross border and double taxation treaty experienced advisors are needed to set up the corporate and taxation structure.

To keep strategic options open and to avoid negative effects on taxation a separate entity for each property is highly recommended.

Advise of a cross border tax structure advisor is highly recommended.

There are a lot of options how to structure property investments in Germany. Upfront we want to stress that we found the typically used “offshore” Luxembourg company structure expensive and inflexible, at least for single investors and small groups of individual with a investment range of between 500k and 20 Mio Euro per single property.

German company law offers 2 types of taxation options.

non-commercial entity

commercial entity

The status depends of the volume traded. The line between non-commercial and commercial is crossed after selling more than 3 units (!) within 5 years. A unit hereby is defined as a single legal unit. A legal unit could be a multi-family dwelling with 2-500 residential units, as long as the property has one land register its one property no matter how big the value might be,

The main benefit is that the German tax law allows to choose between a commercial and a non-commercial, called asset management entity (company). The non-commercial entity is designed for investors that buy and hold property longterm. If you plan to buy-and-flip or buy and develop to resell you are a trading business and considered commercial, therefor the non-commercial status will not apply. At the start of the company you choose the non-commercial status, and you should alwas start as a non-commercial even if you plan to split and sell. Because the status will be automatically switched if you trade more than 3 properties within 5 years. Especially for foreigners a non-commercial GmbH structure with its 15,6% income tax and its extemption from commercial tax (Gewerbesteuer), is more or less a tax-haven and makes sense from a taxation poont of view. The possibility to treat the equity of a sharholder as a loan, and the right to treat the intrest (payed out or not!) as a cost is another advantage of this structure. However the down side of choosing a GmbH (or any other non-tax transparent vehicle) is that capital gains won’t be free of tax (after 10 years of holding the property) . This could be avoided by a mixed structure like GmbH & Co. KG. In any case as a foreigner you should always take into account that the taxation law of your location of residency could apply. Especially if there is a double taxtion treaty. A tax advisor that is used to cross border deals and structures should be advised in any case. No matter what your tax consultant advises and not matter how urgent the situation might be, always choose one entity for one property. Property investmemts are a bet on a location, and this location quality might improve or not, on top the legal situation could be changed by the municipality (must known terms: Sanierungsgebiet, Millieuschutz, Denkmalschutz) forcing you to switch strategy. To make sure you can switch strategy on the property level and don’t harm taxation of other property investments you should use one entity for one property.

We can get you in contact with the tax-advisors that help us and many of our clients to structure cross-border deals.